Thursday, July 2, 2009

A Dirty Secret

Greetings good citizen,

I’m a big fan of ‘perspective’ because how we view our circumstances dictates how we feel about them. I’m sure many of you are just as perplexed as I am regarding the general ‘apathy’ expressed by the public over the outrageous behavior of both the government as well as that of the elite.

The source of that ‘apathy’ is easy to comprehend, If the people elected to rein in excess don’t do their job…and nobody jumps on them, what the hell can you do about it?

Okay, supposing you have more backbone than most, you can jump on the people who are supposed to be keeping an eye on things…except you can’t reach them. You can only access the ‘temp’ answering the phone that day (if by some miracle you get past the automated attendant) who has been told in no uncertain terms not to let anyone other than the President disturb them.

More backbone? Okay, let’s assume you get on your pony and ride over to where your rep lives. If he’s there, it is most likely he’ll sic the cops on you if you aren’t content with his initial response, which is to blow you off by asking you to call his office with any matter you have on your mind.

Again, it is extremely unlikely that you’ll end up in this individual’s face, they ‘have people’ for that…even when they’re home. So you’ll likely get ‘blown off’ by an aide.

Okay, last resort; you attend an official ‘public’ event where your rep is scheduled to speak…just not to you. The audience has already been ‘seeded’ with people that will ask him questions he has a ‘prepared’ answer for…this is politics after all, where any ‘misstatement’ will be brutally exploited by his opponent.

Great system we’ve got here, isn’t it?

And naturally, I have once again digressed big time from the original topic…perspective.

Please shift mental gears with me as tonight’s offering explores the basis of capitalism…

Debt is capitalism’s dirty little secret

By Ben Funnell

Published: June 30 2009 19:14 | Last updated: June 30 2009 19:14

Just why is there so much debt in the Anglo-Saxon world? Bankers and regulators know well that it is in nobody’s long-term interests to have allowed borrowing to escalate to a position where the US now owes far more, as a multiple of the economy, than at the start of the Great Depression.

The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.

The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest. As was recently pointed out in the New York Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the bottom third of the US population put together – about 100m people. These are staggering statistics, confirmed by measures such as the US and UK’s ever-rising Gini coefficients, which estimate income disparity. Another way of putting this is that the share of profits in gross domestic product is at a 100-year high, or was until very recently.

Put simply, the benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population. So why has there been no revolution? Because there was a solution: debt. If you couldn’t earn it, you could borrow it. Cheap financing was made widely available. Financial innovations such as the asset-backed securities market aided this process, as did government-sponsored agencies such as Fannie Mae and Freddie Mac. Regulators welcomed it all while perhaps taking insufficient account of the moral hazard problem it posed: that ever-increasing leverage meant the authorities had to keep interest rates low, otherwise the debt burden would cripple consumption. This prompted more leverage, which exacerbated the problem.

A walk in any low-income area in the UK confirms this. There are BMWs in the driveways, satellite dishes on the roofs and furniture delivery vans on the streets. In both Britain and America the jobless were encouraged to buy their own homes. No one begrudges anyone else the right to own a home or buy luxury goods. The problem is that the luxuries need to be paid for out of earnings and the houses out of equity topped up with an affordable amount of debt.

The question is whether the debt load – total US credit market debt outstanding was $53,000bn (€38,000bn, £32,000bn) at the end of March, or 3.7 times GDP – is at all sustainable and, if not, how it can be lowered without sinking the economy. [Short answer, it can’t] Those pushing extra debt in an effort to boost the economy via increased consumption point to the scale of assets backing the debt. The net worth of US households, including their houses and after counting debt, was $50,000bn in March, according to the Fed. Not a bad tally for 306m people: $165,000 each. However, the cost of servicing this debt as a proportion of income, even with record low rates, is at a 30-year high, above 15 per cent, as incomes have stagnated and the total level of debt has risen.

The debt burden has to come down, which means more saving and lower economic growth for many years to come. Along the way inflation is likely to return, probably sooner and more violently than most expect, which will prompt investors to demand a higher return and make it even harder for governments to tackle the debt. At best the debt will fall slowly over many cycles and simply trim otherwise resilient growth. At worst it could cause growth to lurch upwards before tumbling again, with all the attendant uncertainty that entails. At this point, no one can know which is more likely. I incline to the more benign view because of the size of household assets but, if the dollar’s reserve currency status should come under serious attack, rates would have to rise to defend it and that could itself cause a consumption crisis.

What can be done? First, although it is not ideal, we should not be too hasty about abandoning the capitalist model. It is less bad than any other system yet invented. [Yet another pundit talking their paycheck] But we should redouble our efforts to increase productivity through innovation and creating new markets;[like compensation hasn’t been moving backwards in response to productivity gains? Yet another capitalist cry to work harder for less!] simply squeezing lower-income workers is a bad option, which helped get us into this mess in the first place. [Yet these dimwits don’t have a better idea so it’s grow, grow, grow our way out of this!] This requires investment in education and research.[both are ‘noble goals’ but they are not by any means a ‘solution’.] Second, we have to learn to live within our means. [This is a call for a ‘magical’ solution where we continue to consume more while spending ‘less’, how the hell does that work?] This means spending less than we earn, perhaps doing without the BMWs, flat-screen television sets and leather sofas. Third, we should be careful in distributing the higher tax burden that we will inevitably have to bear over the coming decade. Very high marginal tax rates did not work in the 1970s and will not work now. [Because he said so, they worked just fine during the Great Depression because employers were ‘motivated’ to pay their workers rather than hand ‘excess profits’ over to the government.] That said, income disparity at current levels is a political time-bomb that needs to be dealt with. Finally, we should all come to terms with the fact that these are structural issues needing structural solutions; they need to be enforced over a longer time period than any one government’s term. So we need a new political consensus, one aimed at reducing overall debt levels while reducing inequality by encouraging education, entrepreneurship and investment in innovation.

The writer is an asset manager at GLG Partners

Welcome to the bizarro world of the conservative mind, where staggering contradictions can exist in perfect harmony.

Understand that it is perfectly logical to a conservative to invent a technology that can convert sand into gold, thereby making us all rich beyond belief!

When any rational person can readily see the flaw in this idea, there’s no need for the technology, we can simple cut to the chase and proclaim sand as gold, because if gold were to become as abundant as sand, it would be worth just as much.

He nails the debt thing but then proceeds deny what needs to be done to correct the situation.

Is the problem ‘systemic’? It most certainly is but only an idiot believes the same system that created the problem can be used to solve it!

Why do both politicians and financial people keep harping on the same two ‘solutions’ as if we were suffering from a dearth of either?

There are tens of thousands of young people that have taken on more debt than they’ll ever be able to afford, chasing an education in a field of endeavor that has no openings for them!

Then there’s the innovation/entrepreneur canard. This is a major failure to recognize the true problem…who will be able to afford the product?

Hey, peanut butter tacos may be the next big thing but how do you sell something people can just as easily/cheaply make for themselves?

As I have pointed out before, ‘capitalist utopia’ doesn’t exist because there simply isn’t enough market share. We have a name for enterprises that fail to attract sufficient market share; we call them bankrupt.

Okay, lets suppose innovation is the answer…has there honestly been anything ‘new’ since ‘Pong’?

Short answer, no.

Are there puzzles waiting to be solved? Most certainly…but a vast majority of them are well beyond the scope/pocketbook of the typical garage tinker-er.

Here we have an essay that points to the fundamental problem with the existing system and the author then turns tail and decides it’s more important to defend the system.

Lie back on your leather sofa and contemplate how much you could have saved buying Hyundai rather than that Beemer sitting in the driveway of that 5,000 sq ft house you’re struggling to pay for on the salary you make cleaning toilets down town.

Talk about a ‘bitch slap!’

Yeah, the ‘way out’ is for you to ‘tone down your expectations’ and start living within your means…after you’ve spent a bundle on an education in a field nobody is hiring for and starting a new business that has no customers…

Which, not too surprisingly, also points directly to what is wrong with the current system.

Our system of commerce isn’t diverse enough to provide more than a few ‘well-connected’ individuals with an ‘income stream’.

And each and every one of us needs a reliable income stream. As the current ‘crisis’ clearly indicates, the loss of your income stream causes a cascading systemic failure.

Your ‘inability to pay’ creates the same predicament for your creditors.

This is why debt is so dangerous for something as fragile as civilization.

Our ‘debt-driven’ social model has reached the end of its rope. If civilization is forced to make good on the reckless mountain of debt, run up by the privileged few, civilization will collapse.

This article asserts that consumption is driven by debt. Why do you suppose that is? Mother Nature doesn’t have a cash register so who the hell is getting paid all of these trillions of dollars?

The ‘owners’…

Yep, we are paying the owners for what they get for free (since Mother Nature doesn’t have a cash register.)

Understand good citizen that our legal system was established ‘primarily’ to protect ownership rights to that which belongs to all of us…

Yes, it is the same legal system that fails to prosecute the theft of hundreds of billions of dollars in pension funds via fraudulent collateralized debt obligations. But that is considered an ‘error in judgement’ and therefore is not a crime.

Which leads us to a question that has been carefully side-stepped since the founding of this nation…should anyone be allowed to deny anyone else access to the bounty of nature?

Strangely, this ‘crime’ is legal and forms the entire basis of what passes for our system of commerce.

Worse, if you are born without ‘capital’ then your only option is to sell your labor for whatever it will fetch on the ‘open market’. A market so ‘open’ that our ever so helpful government takes it upon itself to publish the prevailing wage for your skill in your area to ensure your potential employer doesn’t ‘overpay’ for your labor…

Which leads us to tonight’s second offering , an excerpt of the Declaration of Independence.
[purloined from Jesse’s crossroads café ]

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,

That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed.

But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security...”

The US markets will be closed on Friday July 3 in holiday observance of the anniversary of the American Declaration of Independence from the rule of England.

The rest of the world will somehow manage to muddle through on its own as best it can, and continue to consider its options and alternatives to the US Dollar as the prime measure of international trade and sovereign wealth.

Is there an ‘alternative’ to capitalism, good citizen, and how will we determine when those who govern us have gone too far?

Has the government gone too far when it uses taxpayer funds to ‘rescue’ the same entities that have robbed this nation of its ‘vitality’, which they sold for their own personal gain?

It’s not like we don’t have longstanding laws that dictate what to do with bankrupt corporations…so why is our government ignoring those laws?

Worse, why is our government sticking us with the bill?

How much is too much…or as I point out in the intro, how do we protest this kind of treatment?

Will there ever be a candidate willing to stand up to the vested interests within our society and if there ever is, will they ever be appointed to office?

One would like to think that was a rhetorical question but as matters stand, I’m not so sanguine.

Is there an alternative to capitalism? yes there is and its right here!

We will not succeed in releasing ourselves from the yoke of debt we’ve been involuntarily saddled with until we wrest control of the legal system from the self-interested it serves.

Like all things, the laws should be simple, few and easy to understand…

Thanks for letting me inside your head,


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